The head of the U.S. Securities and Exchange Commission is warning brokerage firms about recruiting reps with promises of compensation models that may lead to conflicts of interest.

In Monday’s open letter to broker-dealers, SEC chairman, Mary Schapiro, reminded the firms’ chief executive officers of their supervisory responsibilities and warned them about the possible risks attached to certain compensation practices.

The letter, which was produced in response to reports that recruitment programs at some firms are premised on enhanced compensation arrangements, observes that, “some enhanced compensation arrangements could induce brokers to engage in conduct that is not in investors’ best interest and reminds CEOs that they have an obligation to police for such conflicts.”

“For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to chum customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors’ interest,” it says.

Additionally, the letter reminds CEOs that, as their firms grow, their supervisory and compliance infrastructures should retain sufficient size and capacity.

IE